Company Profile

Guangzhou Zhiguang Electric Co., Ltd. is primarily engaged in research, development, design,manufacture and sale of electrical control and automation equipment. The Company provides electricnetwork safety and controlling products, electric motor controlling and energy saving products,electric power supplying controlling and automation products, as well as electric information productsand integrated energy ‐ saving services, among others. The Company distributes its productsprincipally in domestic market. Through its major subsidiaries, the Company is involved inmanufacture of electrical products and development of relevant technologies.

Event

Guangzhou Zhiguang Electric Co.,Ltd. made two announcements. Firstly, its holding subsidiaryGuangdong Zhiguang Electrical Investment Co., Ltd （briefly, Electrical Investment） decided to set upGuangxi Zhiguang Electricity Selling Company with self‐owned fund of CNY 210 million. Secondly, theCompany and its holding subsidiary purchased 60% shares of Guangzhou Huayue ElectricalEngineering Design Co., Ltd with a total fund of CNY 25.8 million.

Comments

The company founded electricity selling company to make preparation for the electricity trade inGuangxi.

Setting up an electricity selling company in Guangxi is an important step for the Company to fit in newChinese electricity system, penetrate into the electricity selling market and actively participate inelectricity system reform in Guangxi which was selected as one of pilot provinces for the reform inMay this year （making the fastest progress in the field in China）。 And Guangxi Electricity Trading Centerhas been officially launched in July.

The comprehensive experimental project for Guangxi electricity reform offers an opening‐up of marketfor electricity selling, allowing qualified market entities to run electricity selling business and electricitydistribution investment business in urban expansion region and industrial park, and encouragingprivate entities to invest in electricity distribution business with mixed ownership structure.

Government intends to nurture electricity‐selling entities with diversified methods, encourage socialentities to invest in the business, and allow these enterprises to buy electricity from power plants andsell it to final users.

So far four direct transactions between giant electricity users and power plants have taken place inGuangxi. The total trading volume reached 1.18 billion kilowatt hours. The price decreased by CNY 0.1to CNY 0.15 per kwh, which was offered by power plants, without any participation of electricityselling entities. We project that Guangxi electricity‐selling side will have a more open market, andsocial capital is expected to join the regional electricity selling business and electricity distributioninvestment business by setting up electricity selling companies.

In 2015, the total electricity volume consumed by Guangxi Province is 13.34 billion kilowatt hours,industrial and commercial consumption approximately 10 billion kilowatt hours. If calculated based onthe discount provided by the electricity companies in the four direct transections in 2016 mentionedabove, the market space for electricity volume increase exceeds 1 billion kwh. The benefit will beshared by the electricity selling companies and users.

Since the electricity reform progressed rapidly in Guangxi, the Company has already establishedelectricity service companies and industrial parks, and the establishment of electricity selling companythis time is another significant step in breaking into electricity market in Guangxi. There is a synergybetween Zhiguang Nanning Electricity Service Company and Zhiguang Guangxi Electricity SellingCompany. Through this effect, the user resources gathered by the electricity service company, whichwas set up in 2015, can be transferred to electricity selling company. After business expansion inGuangdong, the company focused on Guangxi market.

Acquisition of the design company helped Zhiguang stretch on the industry chain.

The company's acquisition of Guangzhou Huayue Engineering Design Company further extended itsreach on the industry chain. Since the company has already accumulated resources and experience inelectricity controllers, electricity cables, comprehensive energy‐saving service and electricity servicebusinesses before, this acquisition will help the company to gain qualification and talents in electricitydesigning and engineering, forming a complementary relationship with current business. Therefore,this acquisition will not only complete the company's industry chain, but also expand current business,strengthen the synergy effect, and improve the profiting ability and competitiveness.

Guangzhou Huayue Electricity Engineering Design Company has achieved qualifications for Class‐Bengineering design （wind power, new energy, power transmission, and power transformation）， Class‐Bengineering investigation, and Class‐C thermal power & construction consulting. It promised that thenet profit will be no less than CNY 5 million, CNY 6 million, and CNY 7 million respectively. If it failed torealize its promise, the unearned part will be compensated by the amount paid by the acquirer incash.

By now, the company's business has covered the whole industry, including engineering design, facilitymanufacture, energy‐saving service, electricity selling and electricity service, making itself the mostintegrated company on the market.

Earnings Forecast and Investment Grading:

In 2016 the company is expected to make a significant progress. It is forecast that EPS in 2016, 2017,2018 is 0.42, 0.60 and 0.79 respectively, implying 51.5x 16E PE, 36.1x 17E PE and 27.3x 18E PE.

Reiterate BUY.

Potential Risk: lower‐than‐expected progress of reform of electrical industry, lower‐than‐expectedprogress of business expansion such as electricity service